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The Housing Boom and Bust

Tim Challies

Tim Challies' Blog

2009Aug 07

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At a time of global economic crisis, in all of the talk of a subset
of that crisis, the housing boom and bust, it is easy to lose sight of
the fact that the cause of that bust is so very simple. “Behind all the
esoteric securities and sophisticated financial dealings are simple,
monthly mortgage payments from millions of home buyers across the
country.” When the housing payments slowed or stopped, sometimes by
necessity and sometimes by choice, the boom turned to a bust. Real
estate markets that had seen an unparalleled explosion of growth
suddenly saw a catastrophic fall. Behind all the talk of stimulus and
bailouts and increasing billions and trillions of dollars is normal
people unable to make their $1000 or $2000 monthly mortgage payments.

In The Housing Boom and Bust, conservative economist Thomas
Sowell looks to the housing bust and asks the simple, bedrock question:
Why did so many monthly mortgage payments stop coming? His answer is as
simple as it is lucid. The mortgage payments stopped coming in because
during the housing boom, a time where interest rates were at historic
lows, mortgages had been given to people whose prospects of repaying
them were, at best, very poor. While the banks deserve some of the
blame, they were in fact forced to hand out risky loans by
government policies that imposed arbitrary quotas set by people whose
concern was far more political than economic. These people, in the name
of affordable housing and under the banner of political correctness,
demanded that loans be provided to people who, under normal
circumstances, could not afford them. This pressure caused financial
institutions to hand increasingly “creative” (read: risky) mortgages to
increasingly risky (read: poor) clients. When normal times resumed and
interest rates rose, so too did payments. When payments rose, they
became unaffordable and millions of people simply walked away, unable
or unwilling to cover the new costs. “Why pay a $500,000 mortgage on a
$300,000 home?”, they reasoned. Faced with a glut of foreclosures,
banks began to offer homes at fire-sale prices, driving down costs
across the market. The bubble burst, the banks began to fail and the
government began printing vast quantities of money to stimulate the
economy and to bail out the banks. The story continues.

In just 148 pages, Sowell explains where this crisis came from and
the events that caused it all to come to a head. Along the way he
powerfully exposes the cause of rising housing costs and the folly of
affordable housing. As he has done repeatedly elsewhere, he exposes the
fallacy of racism in lending institutions, showing that much of the
blame must be laid at the feet of politicians. “Politicians in
Washington set out to solve a national problem that did not exist—a
nationwide shortage of ‘affordable housing’—and have now left us with a
problem whose existence is as undeniable as it is painful.” Of course
Sowell also proposes a way out of the mess and those who know him will
not be surprised to learn that he lobbies for laissez-faire, allowing the economy to sort itself out without massive government intervention.

As he looks to the government’s reaction to the crisis, Sowell’s
predominant concern is that the government, led by President Obama,
will follow the words of chief of staff Rahm Emanuel, who said, “You
never want a serious crisis to go to waste. … it’s an opportunity to do
things you could not do before.” The government has an almost
unparalleled opportunity to use this crisis to “fundamentally and
enduringly change the institutions of American society.” Yet the
reality is that, for all their flaws, these institutions have had an
incredibly successful track record over the past two centuries, this
crisis notwithstanding. “What is now being proposed is to jettison all
that for the sake of untried theories, because of an economic situation
that has arisen in a relatively few years as a result of government
interventions with a terrible track record that have led to a crisis
that now provides an opportunity for more of the same—in the name of
‘change’.” As the government increases its control over the American
economy it essentially buys up the freedom of its people with their own
tax dollars.

In The Housing Boom a Bust Sowell provides a plain-English
explanation of the economic disaster and one that anyone can read,
understand and enjoy. Though the book must have been written in a
hurry, it shows none of the usual marks; instead, it is well-written
and well-edited. Published just a couple of months ago but dealing with
today’s issues, it reads almost like a newspaper or magazine article.
If you, like me, have tried and failed to understand the cause of the
crisis, this is the place to begin. Sowell is a steady and trustworthy
guide.